Modeling the U.S. Postal Network December 8, 2010 Princeton, NJ

Agenda ●Introduction ●The Postal Industry ●The U.S. Postal Service & its Network Infrastructure ●Postal Distribution Concepts ●Modeling the USPS Network ●Q&A

decision/analysis partners ●Founded 11 years ago ●Three practices  Logistics & supply chain  Information & communications technologies  Postal service ●Technical & management consulting  Operations management

Postal & Mailing Industry Postal Regulator Policy Laws Regulations Mailers Strategy Business Plan Postal Enterprise Postal Sector Network Operations Services Delivery Service Providers Other Operators

The Mail ●Mail vs Parcels -- Letters vs Flats ●C2C: Personal Communications  First class mail  Subject to electronic diversion ●B2C: Transaction & Advertisement  First & “standard” mail  Standard: 0.5%$ growth over next 10 years ●B2B: Transactions  First & Express  Eroded ●C2B: Bill payment & reverse logistics  Bill presentment in mail but payment online.

United States Postal Service ●500 million pieces of mail daily  UPS: 15M Worldwide FedEx: 2.6M ●$68 billion Revenue  First-Class Mail $36 b Ad $17 b Others $15B ●Large infrastructure  269 Processing and distribution plants  218,684 vehicles ●Evolving Network  Volume subject to the economy and electronic diversion  923,595 new delivery points added to the network in 2009  43.8 million address changes processed in 2009

USPS Postal Products MARKET DOMINANT PRODUCTS ●First-Class Mail:  Single-Piece Letters, Cards  Presort Letters, Cards  Flats  Parcels ●Standard Mail:  High Density and Saturation Letters, Flats & Parcels  Carrier Route, Letters, Flats  Not Flat-Machinables and Parcels ●Periodicals Mail ●Package Services Mail COMPETITIVE PRODUCTS ●Express Mail ●Priority Mail ●Parcel Select Mail ●International Mail:  Expedited/Priority  Air Parcel Post

How the mail moves (simplified version) Mail collected Sacramento CA To Post Office Primary Sort Delivery Sort Mailers PHL MEM SFO Mail sorted at 958 to 94Z then to SFO Delivery point sequence in Trenton 085 to Princeton DDU To delivery carrier

How the mail moves Mail Prep Letters Flats Small Parcel / Roll (SPRS) Packages Platform OperationsMail Processing Advance Facer Canceller System (AFCS) Automated Flat Sorting Machine (AFSM 100) Small Parcel & Bundle Sorter (SPBS) Automated Package Processing System (APPS) Delivery Bar Code Sorter (DBCS) DBCS Input/Output Subsystem (DIOSS) Flat Sequencing System (FSS) BMEU

Hierarchy of Facilities ●National Distribution Centers (21)  Bulk Mail and Parcels Processing  Two-tier Regional Distribution Secondary Sort ●Processing & Distribution Centers (About 300)  Facing & cancelling mail  Outbound primary sort  Destination Delivery Sequencing ●Surface Transfer Center (STC)  Tray & Container Cross-docking

Lettermail Plant

Parcel Sorter Flow Analysis (Montreal)

Material Handling Simulation (Montreal)

Network & Distribution Concepts

Why do we need a network? ●Transporting each mail envelope from its origin to its destination with its own driver would be prohibitively expensive, so… ●We stage the mail and we bundle the mail for transport and delivery  We collect the mail and stage it to process it and deliver it once a day  We sort the mail in order to bundle it for transport and delivery

Bundling & staging are critical distribution processes Mode of TransportBundling/Staging Freight Railblocks/unit trains staged/switched in flat or hump yards LTL TruckingPallets, pallet positions staged in warehouses Container ShippingStacks in ships staged in container ports. The process of staging and sorting is common to transportation and distribution. Flat objects such as envelopes provide a significant economic opportunity to bundle. Postal processing represents about 82% of operating costs – transport about 12%.

The Network

Network LayerElementsTime Horizon Real EstatePlants, Facilities20 to 30 years Equipment, FleetSorting & material handling systems, trucks, planes 5 to 20 years People, SkillsClerks, drivers, planners, managers, trainers. 2 to 20 years Sort Plans & Schedules Sort & operating plans, transportation & other schedules. Real time to 1 year Measurement, Mgt & Planning Evaluation, planning & forecasting. Management Real time to 3 months

What controls the flow of mail? ●In the short run, mail flows are under the control of  Sort plans: bundling the mail into trays for further processing  Operating plans: staging the mail for processing, transport or delivery, and  Schedules: Transport (trucks, rail, planes), people, facilities, etc.

Network Topology ●Layout pattern of interconnection of the elements of the network ●Topologies and hierarchy of nodes imply a distribution strategy:  Star: All P&DC connected to one central mega-plant  Full mesh: Each P&DC connected to each P&DC  Tree: Each P&DC is connected to a regional center

What impacts the network’s shape? City 1 Vol V1 City 2 Vol V2 City 3 Vol V3 City 4 Vol V4 City 1 Vol V1 City 2 Vol V2 City 3 Vol V3 City 4 Vol V4 Alternative A Alternative B one day

What impacts the network’s shape? Alterna- tive ProcessingTransport A● Several plants ● Smaller facilities ● Lower productivity per plant ● Additional handling for some mail ● Higher total processing cost ● Shorter trips ● Lower transport volumes ● Lower circuity (perhaps) B● One larger plant ● Higher productivity in the plant (perhaps) ● Longer processing times (perhaps) ● Longer trips ● Higher volumes ● More transportation

Network Modifiers Cased Letters DPS Letters FY 2007 USPS Sequenced 130 Billion Letters Resulting in Over $5 Billion Annual Savings

Plant Productivity Hours per Piece Handled as a function of Total Piece Handled per Plant per Year (M)

Network Modifiers Barcoding APPS MLOCR AFCS RBCS DBCS AFSM ATHS IDR DIOSS-EC PARS FSS RCS Other Changes ●Volume changes  Volume/electr. diversion/recession  Mix ●Population changes  New addresses ●Mailer network induction sites ●Transport  Aviation economics  Air security & handling  Fuel costs ●Increase in volatility ●International volumes Processing Productivity Improvements

What impacts the network’s shape? ●The network is constrained by time  One-day service areas constrain operating plans and facility locations  Three-day and some two-day areas require the use of air transport ●Larger processing plants are more efficient up to a point  Mail can be sorted more continuously  Efficiency per letter handled plateaus at a certain volume  Mail can be sourced from longer distances

Modeling the Postal Netowrk

Objective ●Support USPS Office of Inspector General  Engage in public discourse about USPS network infrastructure  Educate public policy debate and the policy establishment  Provide benchmarks for public policy ●Introduce USPS management to new concepts  “Appreciate” the impact of initiatives on network topology  Plan for the future at all five layers

Approach ●A “complex” problem  Previous efforts at closed modeling failed  Too many details – not enough details. ●Simulation approach  Stay away from complex mathematical constructs  Emulate & evaluate distribution approaches & constraints ●Technology  Repast (Recursive Porus Agent Simulation Toolkit) Symphony: Advanced, free, and open source agent-based modeling and simulation sourceforge.net Douglas Samuelson and Charles Macal, "Agent-based Simulation Comes of Age," OR/MS Today, Vol. 33, Number 4, pp , Lionheart Publishing, Marietta, GA, USA (August 2006).

Simulation ●Agent Class: Facility  Subclasses: Consolidator and Non-consolidator ●An initial number of facilities are seeded ●Mail is directed from zips to facilities.  Operations in each plants are simulated based on mail input and output  Cost are tallied: processing & transport  Mail performance is tallied Standard Plant Consolidatio n Plant (Hub) Truck (Surface) Plane (Air) Processing AgentTransport Agent Abstract Agent Abstra ction Simulation Agent Class Hierarchy

Model Structure Other Processing Agents New Mail New Mail Route d Mail Route d Mail Routing Rules Processing Agent Processing Cost Functions Total Cost Transport Cost Mail To Deliver Routed Mail Surface Transport Agent Surface / Air Transport Agents Local ZIP Codes Incoming Mail

Processing & Transport Cost Parameters ●Processing Costs  Workhours (labor) computer based on plant productivity statistics  Workhours include Primary Outgoing, Secondary Outgoing, or Incoming sorts  Using average labor cost per hour ●Transportation Costs  Ground: $0.009 per cubic foot mile  Air: $ per lb per mile flown depending on type of mail ●Statistical conversion factors are used 33

Distribution Strategies ●Point-to-Point  Mail is sent directly from origin plant to destination plant  No intermediate stops,  By truck if 500miles. ●Peer-to-Peer  Mail takes the shortest-path route between origin and destination (Dijkstra's algorithm)  No surface transportation leg exceeds 500 miles. ●Hub-and-Spoke Consolidation  All mail is routed through Consolidation hubs origin to destination  Except mail with the same O-D, which is just delivered locally). ●Hybrid Consolidation  O-Ds that are <500mi apart exchange mail directly  Mail between all other O-D pairs (distance >500mi) is routed through Consolidation hubs.

Facility Placement Using 90mi Service Radius 35 Service Radius: 90mi Facility Count: 170 (includes 16 Consolidators)

Facility Placement Approach #1: Maximum Service Radius, Example 36 Computed facility placements based on 150mi max service radius (for illustration): Max Service Radius: 150mi Facility Count: 82 (includes 15 Consolidators)

Distribution Strategies ●Peer-to-Peer Strategy  Facilities attempt to send mail directly to the destination.  Transportation inefficient - many trucks with small loads. ●Consolidation Strategy  Select facilities are used as Consolidation points in the network  Mail is routed through these hubs to achieve processing economies of scale  Longer transportation distances, but trucks will be more full 37

Modeled Mail Types 38 ExpressPriority1st ClassStandardPeriodicalsPackage Letters Flats Parcels Modeled Mail Types Non-Presorted Presorted

Sample Model Results StrategyP2PConsolidation Radius90 Miles200 Miles90 Miles200 miles # Facilities Work Hours248K277K212K211K Ground Transport $13.3M$22.8M$21.0M$30.4M Late Mail0%10%3%13%

Transforming the Postal Network

Preparing the Postal Network for the Future The World will be increasingly… ●Digital: Use of data -- Mixed media ●Volatile: More rapid changes in volumes, mix, O/Ds ●Uncertain:  Less predictable volumes  Harder to forecast ●Complex:  Non-linear, difficult causal relationships  More difficult decision making ●Ambiguous: Lack of clarity

Role of the Model ●Use the model as a didactic tool  Model can never be complex enough to be realistic  Use the model to develop cooperation and consensus ●Incorporate the model lessons in a larger context  The five layers

Preparing the Postal Network for the Future ●Design plants with standard work centers ●Use multi-purpose MLOCR equipment for increased flexibility ●Leverage intelligent mail technology to improve productivity ●Create on-demand transportation contracts and fleet (power by the hour) ●Re-map/increase plant capture areas ●Create/consolidate mega- plants outside large metropolitan areas ●Increase footprint flexibility: Consider leasing/renting space for processing in low volume areas ●Develop R/E strategy to deal with transportation congestion and fuel costs Real EstateEquipment

Preparing the Postal Network for the Future ●Implement dynamic network management system ●Enable operating plans – perhaps sort plans – to be adapted in the near/real time.  To take advantage of excess capacity  Improve performance  Reduce costs ●Match manpower to needs (increased use of part-time or flex-time labor) ●More decision-oriented culture - Cell-production systems ●Improve how people communicate, seek innovation, and address conflict ●Promote network-friendly cooperation among managers PeopleSort Plans & Schedules

Preparing the Postal Network for the Future ●Develop business analytics  Simulation  Forecasting  Predictive Modeling ●Institutionalize network control  Network cooperation and collaboration ●Develop dynamic network management capabilities  Ability to react Measurement, Planning & Mgt

●Questions?